Australian dollar tumbles to lowest since 2009, global stocks plunge

Stephen Kirkland and Jeremy Herron

The Australian dollar has plunged 1.7 per cent and local shares are poised to plummet 1.8 per cent when trading opens on Monday. Oil dropped as much as 6.2 per cent and global equities from China to Europe to Wall Street fell.

"Markets have to go through several stages and right now they're just holding their head and crying.": Wall Street is getting increasingly pessimistic about an imminent recovery. Photo: Richard Drew

The Aussie was trading at US68.64¢ at about 4pm in New York, or 8am AEDT on Saturday, recovering from an earlier drop to US68.27¢, its weakest since April 2009. ASX futures were 87 points or 1.8 per cent lower at the closing bell in New York.

Stocks tumbled around the world, while bonds and gold jumped as oil's plunge below $US30 sent markets reeling. Treasuries extended gains as economic data and earnings added to concern that global growth is faltering.

The Australian dollar briefly broke through US77 cents to a three-week high. Photo: Glenn Hunt

In New York, the Dow Jones industrial average fell 391.79 points, or 2.39 per cent, to 15,987.26, the S&P 500 lost 41.56 points, or 2.16 per cent, to 1880.28 and the Nasdaq Composite dropped 126.59 points, or 2.74 per cent, to 4488.42.

European stocks fell into a bear market and the Shanghai Composite Index wiped out gains from an unprecedented state-rescue campaign as global equities added to the worst start to a year on record. Oil touched $US29.28 a barrel as Iran prepares to export into a global supply glut. A measure of default risk for junk-rated US companies surged to the highest in three years. Yields on 10-year Treasury notes dipped under 2 per cent as doubts grow that the Federal Reserve will raise interest rates. Gold surged 1.6 per cent with the yen on haven demand.

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Crude's drop to a 12-year low is sending shock waves around the world at the same time concern is mounting that China's policy interventions will fall short of stoking growth in the world's second-largest economy. Figures on retail sales and manufacturing Friday showed the US economy ended the year on a weak note, and the start of 2016 wasn't any better. Energy firms are laying off workers and currency markets from commodity-producing countries are in turmoil. The slump is also denting the outlook for inflation, causing traders to curb bets on how far the Fed will raise rates this year.

"Markets have to go through several stages and right now they're just holding their head and crying," Krishna Memani, chief investment officer at Oppenheimer Funds in New York, said by phone. "The drama and issue overnight is more related to oil prices not finding a floor. If it was just China and everything else was OK, we'd see through that. But when China is down and oil drops everyday, the market recognises it has substantial issues."

Adding to the unease, Intel dropped 10 per cent after predicting first-quarter sales that fell short of some estimates. The semiconductor maker's note of caution came at the start of an earnings season that may see US profits fall faster than any time since the financial crisis.

Stocks

The Standard & Poor's 500 Index fell to its lowest level since August 25, as the rout in oil persisted and data showing falling retail sales rekindled concern about the health of the economy.

The S&P 500 pared earlier losses that sent it 3.3 per cent lower, as technology and energy stocks led losses. Goldman Sachs Group fell 3.6 per cent after agreeing to settle a US probe into its handling of mortgage-backed securities, a move that will cut its fourth-quarter profit by about $US1.5 billion. Citigroup and Wells Fargo & Co lost at least 3.6 per cent even after reporting quarterly earnings that topped projections. Wal-Mart Stores dropped 1.8 per cent after saying it plans to close 269 stores.

The worst start to a year in US equities on record has left them trading at the most attractive level versus bonds in a year based on one valuation measure. Dividend yields in the S&P 500 have climbed 30 basis points above the yield offered by 10-year Treasuries, a reversal from just last week when the payout from bonds was higher. The S&P 500's multiple based on profits is also at a cheaper level. The gauge is trading at 16.8 times reported profits, a 8.6 per cent discount to its average multiple over the last year.

The Stoxx Europe 600 Index retreated 2.8 per cent, capping a weekly drop of 3.4 per cent. Europe's benchmark closed more than 20 per cent from its record in April - meeting the common definition of a bear market.

Commodities

West Texas Intermediate crude fell as much as 6.2 per cent, before trading 5.4 per cent lower at $US29.06 a barrel. Brent fell 5.9 per cent to $US29.05 a barrel. The discount on global benchmark Brent reached a five-year high as Iran moved closer to restoring exports.

While WTI is down 10 per cent for the week, Goldman Sachs Group says crude will turn into a new bull market before the year is out as the price rout shuts down production, putting the US shale-oil boom into reverse in the second half of the year. As US production slumps by 575,000 barrels a day, global oil markets will tip from surplus to deficit, the bank said in a report.

Gold headed for the biggest gain in six weeks as Chinese stocks retreated into a bear market and US retail sales capped the weakest year since 2009, increasing demand for a haven. Platinum fell to a seven-year low. The metal has been whipsawed this week, after rallying to a two-month high last Friday.

The Bloomberg Commodity Index, which measures returns on 22 raw materials, dropped 1.5 per cent to the lowest level in data going back to 1991.

Emerging Markets

The MSCI Emerging Markets Index fell 2.2 per cent on Friday and 4.5 per cent this week. Shares in Shanghai entered a bear market for the second time in seven months, dropping more than 20 per cent from its December high and sinking below its low during the depths of a $US5 trillion rout in August.

The Shanghai Composite Index sank 3.6 per cent on Friday, extending losses after a report that some banks in Shanghai have halted accepting shares of smaller listed companies as collateral for loans. The Hang Seng China Enterprises Index of mainland stocks listed in Hong Kong fell 2.6 per cent to a four- year low.

Currencies

An index of the US currency against 10 of its peers rose for a third week, the longest stretch since July, amid demand for haven assets as oil dropped below $US30 for the first time in more than a decade and Chinese stocks led a global rout.

Russia's rouble sank 2 per cent and South Africa's rand fell 1 .3 per cent, leading a gauge of emerging-market currencies down 0.5 per cent, capping its third weekly decline. Over the five day period, the rouble slid 3.7 per cent and the rand lost 2.1 per cent. Brazil's real and Mexico's peso lost at least 0.9 per cent on Friday.

The Canadian dollar fell for an 11th straight day in its longest run of losses on record. New Zealand's kiwi slumped 1.4 per cent.

The yen appreciated against all its 16 major peers as turmoil in markets boosted demand for havens. The euro also gained, while the Bloomberg Dollar Spot Index, which tracks the US currency versus 10 major counterparts, rose for a sixth day.

US Treasuries gained as traders pulled back expectations for the number of Fed interest-rate increases this year. Data compiled by Bloomberg shows they expect the effective fed funds rate will rise to 0.7 per cent in a year's time, implying one increase, compared with policy maker estimates for four. The 10- year yield fell 10 basis points to 1.99 per cent.

The risk premium on the Markit CDX North American High Yield Index, a gauge tied to US junk-rated companies, surged to the highest level since November 2012. Junk-bond funds reported $US2.1 billion of redemptions in the week through January 13, according to data provider Lipper.